DUG– Ultrashort Oil & Gas Proshares – Despite the fact that crude oil is both higher on the day and still stands above $130 per barrel the options market is starting to signal a sense that the top may yet be in place for crude oil. This Proshares fund attempts to mirror the price action of oil and gas producers that the fund monitors. It does so on a two-for-one ratio and so falls in price twice as fast as the underlying shares rise, on which it is based. Today’s weak stock market is again displaying investor woes over the ramifications of $4.25 per gallon gasoline on the behavior of the American consumer. In that sense, we’re perhaps witnessing some bullish positioning on this stock, which would rise in value if oil and gas producers share prices fall in response to declining consumer demand or outright recession. The positioning in the options market is perhaps even starker. With share trading at $28.45, our scanners have picked up volume in the June contract at the 29, 30 and 31 strikes, where premiums have largely traded to the “ask” confirming that buyers are in ascendancy today.
BUD– Anheuser Busch– It was only just yesterday that we nodded our heads in agreement with a well-quilled research note from a leading banking analyst who felt that a merger or takeover between Anheuser Busch and InBev was simply illogical. At the very least a successful attempt to mix two drastically different cultures would seem a low-probability outcome. But traders are reacting enthusiastically in the options market to an FT report stating that InBev management is prepared to approach Anheuser, and if its attempt fails, will appeal directly to shareholders in an attempt to create the fifth largest consumer products group in the world. Shares in BUD are more than 7% higher, while June call options with a right to buy shares at a fixed cost of $60 are most heavily traded largely to buyers at around 1.00 per contract. The price tag attributed to the offer is said to be $65.00, which therefore increases the appeal of lapping up these calls. However, one really has to evaluate the likelihood of the reality in this case. There are many questions to be answered before the event might or might not happen. Option traders have increased their holdings at the June 60 strike from 19,000 calls one week ago to 27,000 as of yesterday. In today’s action some 68,546 calls have traded at that single strike so far. But it’s not all bullish positioning given the purchase of around 9,000 puts in the September contract at the 45.0 strike for 0.75. Option implied volatility is up by one-fifth at 39.5% on overall option activity of 221,900 contracts.
TAP– Molson Coors Brewing Co.. – Implied Vol. rose by around one-fifth to 28% at fellow brewer Molson. Shares were largely unchanged but the potential for froth in the sector clearly whet option traders’ appetites ahead of the long weekend. More than 10% of overall option open interest is in play today with the at-the-money-60 strike calls in June most active at 0.85 premium, which marks a rise of 30% on the day.
XLE– Energy Select SPDR – Our market scanners picked up on heavy options activity occurring in the June contract of this energy ETF, with what looks like a 2*1 ratio put spread. Shares in the fund are lower by 1.25% today at $86.66, while 14,400 puts at the 80 strike were sold at 1.10. At the same time 28,800 puts appear to have been bought at the 88.0 strike at 3.55, which of course in now in-the-money. The investor will make money in the event that the share price in the energy complex declines even beyond the lower strike. Due to the ratio nature of this trade, the investor breaks even at a share price of $84.00, while profits grow in the event of weaker share prices for oil companies. The sale of the lower strike puts simply helps keep the cost of the trade down in the event that the XLE continues its upswing inspired by $135 per barrel oil.
XLF– Financial Select SPDR– Scary volume in the financials sector shows that the market weakness continues to draw focus from investors for the potential for further spillage. It seems that the “sell in May and go away” mantra has come true this week. Financials are underperforming the S&P 500 index today with the XLF down 1.25% this morning at $24.71. Options activity is mixed with what looks like a large 20,000 call spread at the 24 and 26 strike prices in the June contract. Elsewhere the July 23 and 24 strike puts appear well sought.
LEH– Lehman Brothers Holdings – Lehman’s shares continue to feel the heavy weight of recent analyst’s downgrades. Shares are languishing at $35 each, which is around the most pessimistic price seen during April. Option volume is once again heavy and judging by the fact that option implied volatility continues to climb today (up by 23% to 95%) traders don’t expect any near-term resolution. Today’s put/call ratio of 2:1 is slightly less indicative of Thursday’s 3:1 but the trend towards puts carries too much gravitas to mean anything other than continuation of the local drift downwards for the underlying stock price.
BJS– BJ Services – Options in this oil and drilling company piqued interest on our “hot by option volume” scanner today with some 26,000 options in play relative to overall open interest of 172,420 lots. Despite a 2% share price decline today to $29.55 all of the action is on the call side. The October 35 strike call was heavily bought some 3,500 times at 1.40 implying a breakeven share price of $36.40 at expiration. There was also notable activity in the January strike where it appeared that in-the-money call buying was the order of the day. The 22.5 strike and 25.0 strikes saw notable volume.
LFC– China Life Insurance ADR – Some 17,000 options are in play in very mixed fashion on this Chinese insurer. Shares are lower by 3% today at $59.78 and so well down on October’s $107 high. Options activity that we noted was literally all over the place with well out-of-the-money calls perhaps being sold in exchange for puts.
AVP– Avon Products – Shares are on the rise today – up by 1% at $38.90 while it appears that a single options combination was made as picked up by our screening tool. An equal amount of 5,000 lots changed hands in the October 35 strike calls against the 45 strike puts. The share price at Avon hasn’t breached north of $42 in 52 weeks, while today’s buck in the trend might be inspired by the announcement of a new fragrance to be branded after the latest Bond Girl, Jemma Atherton. This trader sold upside potential beyond 45 and bought the lower strike puts at the 35 strike. The overall premium was reduced to 0.75 in this collar strategy, commonly used to protect against a long equity position. In this case, the investor owning the stock would be happy to part with it at the upper strike price. Meanwhile the 35 strike puts might increase in value in the face of weakness in the share price.
